Archive for 2014

Note: this write-up was sent out to my network on 26-Jun when RYAM was trading at $36 / share. It has since risen to $42. If you are an accredited investor / buysider and want to get on my VIP research list, email me at analyst @ this domain.

Rayonier (RYN) is known to most investors as a timber REIT. But to industrial and manufacturing companies, Rayonier is the leading supplier of specialty cellulose, a product used in a wide variety of end market applications (cigarette filters, cosmetics, pharmaceuticals, LCD display screens, and more). On 27-Jun, investors were introduced to this second business as Rayonier (RYN) completed its spin-off of Rayonier Advanced Materials (RYAM; here).

What makes this spin particularly interesting is that RYN is a REIT. The investor base interested in owning RYN is likely to be very different than the investor base interested in owning RYAM. So it’s possible we experience a situation where yield-hungry investors indiscriminately dump RYAM over the coming weeks. And indiscriminate selling creates opportunity.

What’s also interesting is that the CEO of RYN is now the CEO of RYAM. Now let’s think about this… Why would the most knowledgeable person in the Company choose to go with the Advanced Materials business? My guess in one word: opportunity.

High-level, here’s how the Advanced Materials business works:

RYAM buys wood chips (hardwood or softwood) and through a sophisticated process of pulping, cooking, bleaching and finishing, produces a very unwood-like product known as dissolving pulp (you can think of it as a natural plastic). Here’s an image pre- and post-processing:

This dissolving pulp is then marketed to customers as commodity cellulose and specialty cellulose, depending on the grade / characteristics. RYAM is the worldwide leader in the specialty cellulose business, with greater than 2x sales volume versus its competition. It ranks #1 in acetate (end product: cigarette filters, textiles, LCD film), is top 4 in ethers (end product: pharma, food products), and #1/#2 in high-strength viscose/specialty (end product: tire cords, casings, explosives).

Note: This is the final piece of my 3 part Unconventional Oil theme. In Part 1 (here), I described why $90 is the new “floor” for WTI. In Part 2 (here), I explained why I believe North American unconventional oil companies are the perfect conduit to implement a bullish oil view. And in this note, I cover a specific idea within this theme that I suspect will make investors a lot of money over the coming years.

I am bullish oil. It’s my highest conviction trade (you can read why here). But implementing a bullish oil view isn’t easy; the options are many. What part of the capital structure do you invest in? Is it through equity in oil services companies? Debt in pipelines? Companies focused on deepwater drilling? Deepwater exploration? The ultradeep? Oil sands? Conventional producers? Where? In Brazil? Poland? Russia? What about monocrystalline sand producers? Chemicals suppliers? The list goes on.

For the reasons outlined in Part 2 (here), I believe implementing a bullish oil view via equity in North American unconventional oil producers is the best place to deploy capital. My plan is simple: get exposure to as many barrels of oil in the ground as possible and ride the dual tailwinds of (1) higher future oil prices, and (2) improved extraction technologies. Both of these trends will dramatically increase profit per barrel and firm cash flow.

But investing isn’t blind; success is determined by the price you pay. For North American unconventional oil producers, the key is to find a company trading at a reasonable valuation based on current production and reserves and get cheap / free optionality on the undeveloped land. If you find a company with those characteristics, you should pull the trigger. Immediately.

And with that backdrop, I present my highest conviction trade in my highest conviction theme:

On May 6, I wrote a note calling Altisource Asset Management (AAMC) a 2 billion dollar parasite (here). My conclusion was that RESI (the host REIT) and AAMC (the parasitic management company) were both set to tumble. Judging by the performance of each versus the market, I was dead on:

AAMC down 14%
RESI down 6%
S&P up 4%

The question that stands before us today is: what’s next? For that, I’ll rehash what I wrote on May 6:

Well, absent the market miraculously waking up from its stupidity-induced coma, there’s one other catalyst on the horizon: June 24th. You see, Glaucus has written letters to independent RESI board members attempting to get the current Asset Management Agreement replaced with an at-market rate (thereby eliminating the massive value transfer from RESI to AAMC) and June 24th is the last date the independent directors must give notice to terminate or replace the contract.

Tomorrow is D-Day for AAMC. Either the independent directors do the right thing and replace / terminate the asset management contract, or they do nothing and AAMC will continue to siphon money from RESI at the expense of RESI shareholders.

Here’s the thing: I fully expect the Board to do nothing. Because of Bill Erbey and Luxor Capital, AAMC is likely to continue to gorge itself on RESI’s cash distributions. Which means short-sellers today are going to be disappointed tomorrow.

But this is a sideshow from the real story. The real story is what’s going on in RESI’s core business.

Note: This is Part 2 of my 3 part Unconventional Oil theme write-up. In Part 1 (here), I describe why $90 is the new “floor” for WTI. In Part 3 (update: published here), I’ll write-up a particularly compelling idea inside of this theme. But for now, onto Part 2: why North American unconventional oil demands my investment capital.

As explained in “The Era of Cheap Oil is Over” (here), I’m bullish oil over any time frame: short, medium and long-term. It is unquestionably my highest conviction idea. But having conviction and making money are two very different things; a massive gap lies between being right and making money. What bridges that gap is implementation. In investing, implementation is everything.

So the real question is: what’s the best way to implement a bullish oil view?

To me, the answer is via equity in North American unconventional oil producers. The reasons I believe this to be true are worth sharing:

In-place infrastructure: well-developed oil infrastructure means when a producer locates oil, getting it to market and turning that oil into cash is relatively inexpensive. In other parts of the world, finding oil is just the beginning of a multi-year infrastructure project.

I believe North American oil companies are the perfect conduit to access oil producing assets because they have: (1) no exploration risk, (2) no foreign government risk, and (3) minimal infrastructure / development risk. I’m not aware of any other region on the planet that shares all three of these characteristics.

As to why I have chosen to express a bullish oil view via unconventional producers, those reasons are also instructive:

On April 15, I sent out a note (here) asking, “Would you short this company?”

My conclusion was simple: it was time to short LULU.

That was at $52.50. Here’s what’s happened since:

Yesterday, with the stock down 16% I found myself tempted to cover. But then I began reading the rather sharp words Chip Wilson had for the Board (here):

I am concerned that the board is not aligned with the core values of product and innovation on which lululemon was founded and on which the company thrived.

I have found a palpable imbalance in board representation, which is heavily weighted towards short-term results at the expense of product, culture and brand and longer-term corporate goals. I believe this is impacting the company’s prospects. My vote today sends a signal to the financial community that the company must address this imbalance if lululemon is to fully recover.

And I tried to rationalize why the Company would publish such an apathetic response (here):

Get Buyside Notes via email

(0-6 emails per month)

Leave Blank:Don't Change:

Your email:

General Disclaimer

This site is solely intended as a record of my personal, subjective observations of the financial markets recorded for my entertainment and the entertainment of interested readers. The commentary should not be relied upon in making investment decisions, ever. If you purchase a stock mentioned on this site you do so at your own risk. As with any investment, you may make money or you may LOSE money.
I will not be liable for any losses or damages, monetary or otherwise, that result from the content on this site. While the data on buysidenotes.com, such as stock prices and charts, come from sources I believe to be reliable, it is not guaranteed. I will not be held responsible or liable for any incorrect data contained herein, nor will I be held responsible or liable for any damages that may occur as a result of erroneous data. Tables and charts may include errors or omissions as a result of the data input process. Please refer to other investment resources to verify the accuracy of the data posted on this site.